Japan spending down as deflation persists

File photo of an elderly shopper buying octopus from a fish dealer in the Ameyoko shopping district in Tokyo. Household spending fell more sharply than expected in January with the nation still stuck in its deflationary rut, government data showed Friday

Japanese unemployment inched up and household spending fell more sharply than expected in January, latest government data showed, but analysts said the nation's economic recovery was still on track.

Figures from the internal affairs ministry showed the unemployment rate crept up to 4.6 percent in January from a revised 4.5 percent in the previous month while household spending dropped by 2.3 percent year-on-year.

The inflation-adjusted fall in spending was far bigger than the 0.8 percent dip economists had expected.

However, analysts said the figures did not indicate Japan's economic recovery was in trouble because they were more than offset by upbeat production figures earlier in the week.

The recent batch of data confirmed "the economy is on a gradual recovery track," said Satoshi Osanai, economist at Daiwa Institute of Research.

"The data on production and capital spending continued to be positive. As production recovers and currency exchange rates help improve corporate earnings, we expect employment and consumption will also pick up," he said.

The yen has tracked lower since the Bank of Japan surprised markets two weeks ago with the announcement that it would pump $130 billion more into the economy in the latest push to combat deflation.

The yen changed hands at 81.20 to the dollar and 108.17 to the euro in Tokyo midday trade on Friday, much weaker than 76.19 and 99.56 of a month ago. A strong yen reduces Japanese exporters' repatriated income.

The internal affairs ministry also said Japan's core consumer prices fell 0.1 percent in January from a year earlier, as the deflation that has plagued Japan for years persisted.

Deflation is bad for the economy because it encourages consumers to put off spending in the belief their intended purchases will be cheaper in the future, softening demand and hurting producers.

Yoshiro Sato, economist at Credit Agricole bank, said "there is still room for employment growth especially in manufacturing industries."

"Considering the expected recovery in industrial production going forward on the back of supply chain normalisation and reconstruction demand, we maintain our view that employment in those industries will recover and contribute to stable labour market conditions going forward."

Japanese exporters were hit badly by the massive earthquake and tsunami in Japan and flooding in Thailand last year.

The trade and industry ministry said Wednesday Japan's industrial production in January rose by a bigger-than-expected 2.0 percent from the previous month.

Automakers and electronics manufacturers continue to ramp up output as they try to make up for the disruption they suffered in the Thai floods.

The finance ministry said Thursday that capital spending by Japanese firms grew 7.6 percent in the final three months of 2011 from a year earlier, the first upturn in three quarters, on investment to rebuild damaged facilities.